If you have followed news papers or news channels over the past few months, then headlines such as “US major automobile company to cut its headcount by 14000” or “The world’s fourth largest investment bank in deep crisis” would have been a daily news. You probably would have even read articles about the slowdown in US economy was because to the “Subprime” crisis! (A term which hardly people knew about 12 months ago) But on the other hand, have you observed that the dollar as a currency has grown stronger. Its value has raised against most of the currencies, such as the pound, euro, yen, rupee etc. “So, in spite of the recession, why the dollar value is increasing?” would be an obvious question. Here are some of the points that might be of interest, if you have the same question in mind!
As the US economy tumbled, most of the countries and their major financial institutions expected the US GDP to fall drastically. Because of this the expected GDP of US around the world was around 1.5 to 2%. But to everyone’s surprise, the US’s GDP stood at 3.3 beating everyone’s expectation. On the other hand, Japan’s GDP grew at the rate of -0.2%, while the GDP’s of EU (European Union) and UK (United Kingdom) performed slightly below their respective expectations. This prompted the financial institutions from Japan, EU and UK to invest more in US markets, thereby increasing the demand for dollar. Common sense tells us that when demand is more and supply is less, the rate goes up!
In case of India, the tale is a bit different. Indian economy is heavily dependent of the US economy. Indian stock markets tumbled the moment grey clouds surrounded the US economy. This led the FIIs (Foreign Institutional Investors) to draw their money from the Indian markets and invest in gold bonds (which is considered as the best investment currently). This increased the demand for dollar against rupee. It is neither the case of a strong dollar or a weak rupee. It is just the fundamental demand-supply economics.
Another factor that added to the demand to US dollar was the oil sector. All the countries need to convert their currencies to dollar (which is considered as a global currency for oil trade) to buy oil from the oil producing companies. The soaring oil prices did some help while the low oil prices helped the dollar increase its value against the currencies of countries such as Saudi Arabia, Kuwait etc.
Most of the people who read the above paragraphs get more curious to know the impact of high dollar rate on India is a good or a bad one. To classify the impact as good or bad, you need to know on which side of curve you stand. High dollar rate would definitely be good news, for the export sector of India which includes fisheries, software, textiles to name a few. And for import sectors such as Oil, technology etc, this is a bad news.
Temporarily, high dollar price may be considered as boon to India, as the Indian economy is more of an export oriented economy. In this process the common man may suffer as this will certainly give further rise to inflation. However in the long run, it will be good for India if the dollar weakens. It would force the manufacturing and technology sector, to target the domestic market to boost sales. This would bring in more competition, more variety and competitive prices to the Indian market. This perhaps would also curtail the inflation, because of which India is suffering from past several months.
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